05 April 2012

A Primer on How to Avoid Magical Solutions in Climate Policy

By now there is really no excuse for any professional involved in climate policy not to understand the implications of the Kaya Identity. The risks of not understanding the Kaya Identity is that one can get caught out proposing magic as the main mechanism of reducing carbon dioxide emissions.

Developed by Yoichi Kaya, a Japanese scientist, in the 1980s as means of generating emissions projections for use in climate models, the identity is also an extremely powerful tool of policy analysis, because it encompasses all of the tools in the policy toolbox that might be used to reduce emissions. The identity is comprised of four parts:

If we wish to reduce emissions of carbon dioxide with the goal of stabilizing its concentrations in the atmosphere, then we only have four levers, represented by each of the factors in the Kaya Identity.

In The Climate Fix, I simplify even further by combining population and per capita wealth, the result of which is simply GDP, and by combining energy intensity and carbon intensity, the product of which is carbon intensity of GDP.

That means that there are only two ways to reduce emissions to a level consistent with stabilization of concentrations at a low level (pick your favorite number, 350, 450, 550 ppm -- the policy implications are identical). One is to reduce GDP. The second is to reduce the carbon intensity of GDP -- to decarbonize. While there are a few brave/foolish souls who advocate a willful imposition of poverty as the remedy to accumulating carbon dioxide, that platform has not gathered much political steam. (See discussion of the Iron Law in TCF).

Instead, the only option left is innovation in how we produce and consume energy. That is it -- innovation is the only game in town. Consequently, the correct metric of progress in innovation is a decrease in the ratio of carbon to GDP. For those who wish to stabilize carbon dioxide emissions, the proper policy debate is thus how do we stimulate energy innovation?

Pricing carbon (or energy) is not a point of dispute. Some argue that putting a price on carbon will motivate the necessary innovation. The causal mechanism underlying carbon pricing is that higher priced energy will cause economic discomfort throughout the economy which will consequently motivate investments in innovation on the consumption and production sides of energy. Others, me and my Hartwell colleagues included, argue that the point of putting a price on carbon is not to cause economic discomfort, but rather to raise resources to invest in innovation, with the benefits of those investments securing the political capital necessary for the approach to sustain. Obviously if your goal is to cause economic discomfort you'll favor a much higher price on carbon price than those who seek to raise money for investment without causing economic discomfort.

Another point of debate is whether it makes sense to advocate for emissions reductions directly or focus on those policies that lead to an accelerated rate of decarbonzization, but can be justified on a broader basis than emissions reductions alone (examples include the economic benefits of improving efficiency and the economic and social benefits of dramatically expanding energy access around the world). Again, the Hartwell group looks at the evidence and sees that the political likelihood of dramatically increasing the costs of energy (as well as noting the social and economic consequences of higher priced energy) means that we don't really have a choice in what strategy makes more sense -- the answer is obvious.